Small businesses hit hardest in 2023’s rise in insolvencies, finds Davies report

Filings driven by interest rates, end of COVID-era government supports, says Natasha MacParland

Small businesses hit hardest in 2023’s rise in insolvencies, finds Davies report
Natasha MacParland, Davies Ward Phillips & Vineberg LLP

Canada saw a steep rise in insolvencies in 2023, particularly in Q4 and in Ontario and Quebec, and small businesses bore much of the brunt, according to a report from Davies Ward Phillips & Vineberg LLP.

Rising by 41.4 percent compared to 2020 and 30.7 percent higher than 2019, the firm said its analysis of business openings, closings, and repayment requirements of government-subsidized loans indicated that smaller businesses largely drove rising filing rates. In 2023, 4,810 businesses filed for insolvency in Canada, the highest number since Davies began tracking the data in 2019.

Higher costs reduced purchasing power, and inflation has made financing more expensive, says Natasha MacParland, a partner at Davies who practises corporate law, financial restructuring, and insolvency.

“It's kind of a perfect storm,” she says.

Davies released its findings in its tenth issue of “Insolvency Now.”

Insolvency hit small businesses hardest. While MacParland says the exact causes are unknown, she predicts that the pullback of government COVID supports, interest rates, inflation, and supply-chain issues played a role. “Those have a bigger impact on small and medium-sized businesses than on the larger businesses.”

The firm said around 900,000 of Canada’s 1.22 million small businesses had a Jan. 18, 2024 deadline to repay the $60,000 Canada Emergency Business Account (CEBA) loans they had taken during the COVID pandemic.

The increased insolvency activity was reflected in the 11 applications for leave to the Supreme Court of Canada in insolvency-related cases. Four were granted leave, five were dismissed, and two are still pending.

The insolvency numbers were most significant in Q4 and most prevalent in Quebec and Ontario. In Q4 2023, insolvencies were up 67.7 percent in Q4 2019 and 127.7 percent higher than Q4 2020. Davies found that insolvencies hit construction, accommodation, and food services hardest. Ninety-nine percent of the surge in filings between Q3 and Q4 occurred in Quebec and Ontario. In Q4, there were 886 in Quebec and 435 in Ontario, averaging 642 and 282 in the rest of the year. Filings in Saskatchewan also shot up by nearly 50 percent in Q4.

The 2023 insolvencies were split between 1,108 business proposals and 3,702 bankruptcies. Toward the end of the year, the proportion of business proposals versus bankruptcies decreased. In December, business proposals accounted for only 16.3 percent of all insolvencies, down from the year’s 24.1 percent average. Davies attributes this proportional decline to fewer viable financing options available to businesses.

Construction insolvencies rose by 19.1 percent, and insolvencies in accommodation and food services grew by 43.8 percent between 2023 and 2024.

“We always find that construction and retail are generally two of the most active sectors and insolvency, and last year was no different,” says MacParland.

There were also many more receiverships in 2023 than in previous years, which were most prevalent in Ontario, Alberta, and BC. The number of receiverships grew by 116.4 percent between 2022 and 2023. The number of receiverships in 2023, 474, was also 65.7 percent higher than the total in 2021. The 2023 receivership numbers are similar to 2019 and 2020, but not in the value of declared assets, which were significantly higher in those years – $5.73 billion and $4.23 billion versus $2.48 billion.

Davies found that the number of proceedings under the Companies' Creditors Arrangement Act (CCAA) also spiked in 2023, going from 41 in 2022 and 26 in 2021 to 110 in 2023.

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